Was it China, or Was it Something Else?Submitted by JMB Financial Managers on August 15th, 2015
It is very popular right now to blame the worldwide stock market declines on China. Some analysts picked China's recent economic developments; others focused on their stock market decline; others chose to focus on the devaluation of the Yuan. I believe this is an easy, convenient excuse, rather than the core issue at hand. Consider:
- Betting against China has been a losing proposition for decades, why should now be different?
- The Yuan devaluation made it substantially more expensive to borrow money in Honk Kong or the US (and to repay previous such loans off), curbing excess speculation in Chinese stock markets – an outcome the Chinese government wanted to achieve. What does that have to do with the US stock market?
- I still haven't seen any concrete data showing why a slowdown in the Chinese economy will have a significant impact on the US expansion; in fact, most of the data shows it is a reflection of the slowdown in the US and European economies, not the cause of it.
- I have seen data about Chinese electricity consumption, and it barely shows any slowdown, if at all – suggesting factories, and the economy, haven't slowed much, if any.
So, you ask, what other explanation is possible? Consider:
- Investors may be (appropriately) concerned about valuations.
- Regulatory changes in the US and the EU have caused a significant drop in liquidity, which has increased volatility, leading to larger than normal price swings on a regular basis.
- The Fed, ECB, BOJ, et al have printed so much money in recent years to prop things up; now that they are backing off, there is less ready support for prices.
- Perhaps prices were going up not based upon better fundamentals, but rather because of central banks printing so much money.
- "Everyone" wanted a correction so badly, they finally received one.
In summary, the way I see it is that the correction is here, and “something in China” is a convenient excuse for having a correction in the stock market.
Looking ahead, I think the real test for stock prices will come when central banks have finally stopped printing money, devaluing currencies, and begin to raise interest rates. With the Fed and the Bank of England being the only central banks discussing raising interest rates, I do not think we've reached the end of the line for stocks. We will only get there when the global economy is back to capacity, and that is not likely to be any time soon.
Bottom Line: I think "Something's wrong in China" looks like cover for the swift market correction that the US was due for anyway, and it creates a buying opportunity for long-term investors that routinely hold US stocks within their portfolio.
To discuss your thoughts on the matter, take advantage of a free consultation with JMB Financial Managers.
These are my personal views, and should not be construed as specific investment advice.